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KARACHI, Oct 29: The State Bank has warned of lower-than-targeted growth in Pakistan’s gross domestic product during this fiscal year in case of a “more protracted and extended war” in Afghanistan and in the wake of a global recession. The central bank warns that GDP growth in July/June 2001-02 could range between 2.5-3.75 per cent against the target of 4 per cent.
In its annual report for fiscal 2000-01 released here on Monday, the SBP says that the Sept 11 attacks (on the US soil) have further intensified the global recession which are clearly shown in financial markets the world over.
“Global recession is likely to spread through international trade,” says the report, adding that “commodity prices are forecast to fall by 7 to 8 per cent on average this year.”
Besides, the “demand for Pakistani exports in the EU and the US, which together accounts for 55 per cent of the total exports, has slackened and is likely to worsen.”
The report observes: “Pakistan’s decision to support the US-led coalition (against Afghanistan) and its front-line status has significantly enhanced the country’s vulnerability to additional risks and costs.”
In the short-run, the report notes, a number of factors will come into play:
(1) increase in freight rates and the imposition of war-risk insurance will increase the cost of imports and make Pakistani exports more expensive; (2) cancellation of air cargo flights by foreign airlines will disrupt trade flows; (3) manufacturing units will have to maintain higher inventories; and (4) the possible departure of expatriates from the country and the suspension of visits by foreign buyers (in view of the media-hype about Pakistan being in the war-zone), will not allow the country to maintain normal trade relationships. Furthermore, revenue collection will also suffer due to lower imports, while the continuous influx of Afghan refugees will add further pressure on Pakistan’s limited resources and infrastructure.
“...It is difficult to conjecture how long these trends will persist, since a lot will depend on how the war against terrorism in Afghanistan plays itself out,” says the report, adding that a short and swift outcome will bring an end to these uncertainties and normalize Pakistan’s trade patterns.
“However, a more protracted and extended war will exacerbate the situation causing severe and heavy losses to Pakistan’s economy.
“Under this scenario, exports will decline significantly, foreign investment flows will dry up, capital flight will intensify, output losses will be severe and GDP growth will either be stagnant or negative depending on the intensity, duration and scope of the campaign.
“The World Bank estimates that growth in developing countries could be 0.5 or 0.75 percentage points lower than projected. Applying this to Pakistan’s front-line status implies that GDP growth could be in the range of 2.5 to 3.75 per cent.”
The target set for GDP growth in the current fiscal year is 4 per cent.
The report says that the positive effects on Pakistan’s fiscal and balance of payment situation will follow with the lifting of economic situations by the US and other G-7 countries, resumption of economic assistance by bilateral governments (particularly the US), debt relief and better market access to Pakistani exports. “However, these issues have yet to be discussed, negotiated and settled. The increased scrutiny of the Hundi system following the terrorist attacks, has narrowed the spread between the inter-bank and kerb market; if this persists, it will provide incentive to overseas Pakistanis to send their remittances through the banking system. “Large flows of hard currency will allow SBP to substitute away from kerb purchases and, in doing so, help meet the external gap using more conventional means,” says the report.
“Although it is too early to predict the cumulative impact of these measures in the short-term, to the extent that all the negative consequences outlined above are offset by these positive factors, the events of Sept 11 will have a neutral impact on Pakistan’s economy.”
“...the initial disruption to economic activity and sentiments should (however) not be underestimated,” warns the SBP report.
“If the law and order situation within the country is controlled and the resulting economic disruption minimized, it is likely that the positive factors will have a bigger say in Pakistan’s medium-term prospects.”
REVIEW OF FISCAL 2000-01: The SBP report says Pakistan’s GDP (gross domestic product) rose by only 2.6 per cent in fiscal 2000-01 against the target of 5 per cent. The report attributes the lower-than-targeted growth to poor performance of the agriculture sector due to drought and stagnant private sector investment. “The policy steps required (under the IMF standby arrangement) to address underlying structural problems altered the incentive structure for the existing private sector,” says the report while discussing the reasons for lower GDP growth.
“Drought conditions that adversely impacted agriculture were also reflected in Pakistan’s external sector.”
“Additional oil imports were needed to compensate for reduced hydel power generation, sugar imports were required to ease domestic shortages, while rice exports did not show much growth during the year.”
But despite an unprecedented oil import bill of US$3.4 billion, Pakistan managed to cut its trade deficit from US$1.4 billion in fiscal 1999-00 to $1.2 billion in 2000-01. “This clearly shows that non-oil imports had to be squeezed — and except for oil and textile machinery, all other imports declined during...the year.”
LARGE-SCALE MANUFACTURING: The agriculture sector recorded a negative growth of 2.5 per cent against the target of 3.9 per cent and services sector grew only by 4.4 per cent against the target of 5.2 per cent. But manufacturing sector’s growth was at 7.1 per cent against the target of 5.9 per cent. And in terms of large-scale manufacturing “this was the first time in seven years that all industrial groups recorded positive growth.”
“...the overall growth of 8.4 per cent was spearheaded by sugar, petroleum refining, vegetable ghee and cigarette production, which together account for 25 per cent of LSM.”
INFLATION: The report says that inflation as measured by consumer price index rose to 4.4 per cent in fiscal 2000-01 from 3.6 per cent recorded a year earlier.
TARGETS MISSED: Key macroeconomic indicators furnished in the SBP report show that Pakistan missed many vital economic targets in fiscal 2000-01. Total investment rose by 14.7 per cent of GDP against the target of 15.5 per cent; national savings grew by 12.7 per cent of GDP against the target of 13.6 per cent; tax revenue increased by 13.3 per cent of GDP against the target of 14.2 per cent and total revenue went up by 16.3 per cent against the target of 17.3 per cent. Budgetary expenditure expanded by 21.7 per cent of GDP against the target of 22 per cent but despite that the budgetary deficit rose by 5.3 per cent of GDP against the target of 4.6 per cent.
BALANCE OF PAYMENTS & EXCHANGE RATES: For the first time in its history, Pakistan was able to show a current account surplus in fiscal 2000-01. “However, this did not create easier conditions in the foreign exchange markets, as the rupee experienced tremendous pressure during...the year,” says the report. But it clarifies that “the surplus was generated by a statistical artifact — proceeds from the Saudi Oil Facility were categorized as official transfers and therefore a current account receipt.”
“The second contributing factor was purchases from the kerb market. (The State Bank bought $2.16 billion from kerb in 2000-01, up from $1.56 billion in 1999-00).
“Excluding the impact of changing status of Saudi Oil Facility (a Saudi commercial loan to finance oil purchases from the kingdom) and the volume of kerb purchases” the current account deficit fell from $2.641 billion in 1999-00 to $2.509 billion in 2000-01.
“Despite this marginal narrowing of the external gap there was a great deal of pressure on the foreign exchange market; the main reason was the IMF stabilization programme that was in place.”
